Transcript Is Formulary Apportionment the the path tofuture of

Is formulary
apportionment the path to
multinational tax reform?
Joann Martens Weiner, Ph.D.
The George Washington University
Presented to the Independent Commission for the Reform of
International Corporate Taxation,
New York City, March 18, 2015
Impacts of current international
corporate tax framework
 21st century globalized economy with large, highly-integrated
multinational enterprises
 19th century tax system based on principles of separate entity
accounting with arm’s length pricing
 High compliance costs with transfer pricing for both
businesses and tax administrations
 System encourages base erosion and profit shifting – some
examples: Google saved $60 billion in taxes with a “Double
Irish with a Dutch sandwich,” (NY Times), Apple had more
than $100 billion offshore and avoided $9b in U.S. taxes in
2012 (Senate PSI), Starbucks made “losses” in 14 of 15
years doing business in the U.K. (Kleinbard)
Why a modern tax system is
needed: Data from 4 countries
Germany
Japan
UK
US
Share of tax receipts by source, 2011

Personal income taxes
24.8
18.4
28.2
37.1

Corporate income taxes
4.7
11.8
8.6
9.4

Social security and payroll
38.5
41.4
18.7
22.8

Goods and services
29.1
18.4
32.3
18.3
30.2
37.0
21.0
39.1
1.7
3.4
3.1
2.3
Corporate tax rate, (combined, 2014, %)
Corporate tax receipts (% of GDP)
Capital positions as a share of GDP, 2012

Inbound FDI (%)
26.1
3.8
60.1
16.3

Outbound FDI (%)
36.5
19.0
69.8
27.4
Source: Altshuler, Shay and Toder (2015)
Five specific recommendations for
a formulary apportionment system
 Replace system of separate-entity accounting and
arm’s length pricing with common consolidated tax
base with formulary apportionment
 Exempt active foreign-source income from host country
taxation (i.e., limit to water’s edge)
 Enforce common anti-abuse (“CFC”) rules
 File tax returns in a single tax jurisdiction and work with
a single tax authority
 Reach international consensus on formula
 For complete analysis, see the European Commission’s
2011 proposal for corporate tax reform
The European Union’s approach
(proposed March 16, 2011)
 Common Consolidated Corporate Tax Base (CCCTB)
 One-stop shopping for tax administration
 Common anti-abuse rules
 Exempt foreign-source income
 Limit taxation to the EU’s water’s edge
 One tax base
 One formula
 Consolidate profits and losses across borders within EU
 Member states set their own tax rates
 Optional for businesses
The formulary apportionment
solution
 Instead of measuring profits in each country by using transfer
prices for internal transactions, distribute the consolidated tax
base for the entire corporation according to where the
corporation does business
 The location of the corporation’s business is determined by
the location of its business activity
 Business activity can be measured by location of capital
(property), labor (payroll and employees) and sales
The apportionment formula
 Three factors
 Property – tangible property, buildings, machines, inventories
 Labor – employees and employee compensation (incl. benefits)
 Sales – based on destination
 Each factor weighted equally
 Labor factor includes payroll and the number of employees
 Designed to reflect both supply and demand as well as
different levels of labor productivity across the EU member
states
 Corporate tax base is allocated according to the weightedaverage share of each factor
Impact of CCCTB and
apportionment in the EU
 CCCTB would save businesses 700 million euros in reduced
compliance costs and 1.3 billion euros through consolidation
every year
 More than half of US and EU corporate groups now doing
business in the EU would benefit from the CCCTB (tax
burden falls)
 A typical US company would see its tax burden fall by 6%
and a typical EU company would save 5% in taxes
 Introducing CCCTB would increase the effective average tax
rate only slightly, from 24.4% to 25.1%
 Tax planning still possible for US companies due to lack of
harmonization of withholding taxes on dividends, interest and
royalties
Other developments to consider
 The OECD’s Base Erosion and Profit Shifting (BEPS) project
 Taxation in the digital economy
 Some interest groups in the U.S. advocate moving to
formulary apportionment, e.g., salesfactor.org proposes a
single-factor sales-based formula
 Sol Picciotto of the Tax Justice Network has proposed using
unitary taxation with a three-factor apportionment formula
 The District Economics Group and the Project for Corporate
Tax Fairness recently held a briefing on corporate income
taxation under formulary apportionment
Where to find additional analysis?